Stocks

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By Jeff Glekin

MUMBAI May 2 (Reuters Breakingviews) - India's consumers
are feeling bullish. In fact the Indian consumer is still the
most optimistic in the world, a Nielsen survey said. But booming
consumption is only a real strength if investment can keep up,
which at the moment isn't happening. Otherwise the result will
be more inflation.

Consumer stocks tells the story. The Bombay Stock Exchange's
FMCG Index, which tracks the likes of Nestle,
Colgate, and Tata beverages, is up 21 percent since the start of
2012, or 9 percentage points higher than the benchmark Sensex
index. Hindustan Unilever, the largest consumer goods
maker in India, beat market estimates with a 21 percent annual
rise in quarterly profit on May 1, helped by higher volumes and
prices. Net sales for the quarter rose 16 percent year on year.

That shows up in national figures too. India's consumption
made up 58 percent of GDP in the financial year ending March
2012. China can only dream of such a domestic consumption story.

But the flipside is that India's investment, which makes up
32 percent of GDP, is too low. India's rate of capital formation
declined by 4 percent in the second quarter of 2011-12, and by
1.2 percent in the third quarter. There are several likely
reasons, of which the biggest is probably bureaucracy. Multiple
clearances and approvals make it hard to get big projects
moving. There may also be fears that the demand will not
continue for long.

The risk is that if demand does persist, India's inflation
problem may get worse as consumers bid up the prices of basic
good. Wholesale prices are already rising at around 7 percent a
year. The reserve bank's rate cut last month made it slightly
cheaper for companies to fund investment, but did nothing to
help firms overcome the key bottlenecks of shortages of land and
power. That requires better governance in New Delhi. A central
bank report warned in April that foreign direct investment would
have been 35 percent higher in 2011 if it weren't for so much
"policy uncertainty".

Bullish consumers give the economy strong foundations. But
the government needs to do its bit to get investors to match.

CONTEXT NEWS

- Hindustan Unilever (HUL), the Indian-listed unit of
Anglo-Dutch conglomerate Unilever, said its net profit rose 21
percent for the fiscal fourth quarter ended March 31, year on
year, beating market expectations. Its shares were trading up
three percent at 1200 Indian Standard Time.

- Sales at the home and personal care segment grew 24
percent, while its foods business grew nearly 8 percent.

- India has once again emerged as the most optimistic market
in terms of consumer confidence, says a Nielsen survey. India
retained the top rank with an increase of one point in the
consumer confidence index.

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